Calculate gratuity payable to permanent and fixed-term employees under India's revised labour codes. Includes the 50% wage rule and the ₹20 lakh ceiling check.
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Labour Codes 2025
The Code on Social Security 2020 came into force replacing the Payment of Gratuity Act 1972. Two changes directly affect gratuity calculations.
| Rule | Before November 2025 | From November 2025 |
|---|---|---|
| Eligibility Changed | Five years of continuous service required for all employees, regardless of contract type. | Permanent employees still need five years. Fixed-term employees become eligible after one year of continuous service, provided they work at least 240 days. |
| Wage definition Changed | Gratuity calculated on basic salary plus DA, as designated by the employer. Companies could reduce gratuity exposure through high-allowance salary structures. | Wages for gratuity must be at least 50% of total CTC. If allowances exceed 50%, the excess is added back to the wage base, raising the calculation base. |
| Formula | Unchanged: (Last drawn wages × 15 × Years of service) ÷ 26 | |
| Ceiling | Unchanged: ₹20 lakh maximum payable, also the lifetime income tax exemption limit under Section 10(10). | |
How it is Calculated
The gratuity formula uses 15 days of wages per year of service. The 26 in the denominator represents the assumed number of working days in a month, excluding weekly offs.
Months are rounded using one rule: if additional months exceed six, the year counts as complete. Six months or fewer are dropped. An employee with 5 years and 8 months is counted as 6 years; one with 5 years and 5 months counts as 5.
For permanent employees, courts have consistently held that 4 years and 240 days satisfies the five-year requirement for eligibility. This is not in the statute but is established through case law.
Key Rules
There is no monthly deduction from the employee's salary. Some employers show a gratuity provision in the CTC breakdown, around 4.81% of annual basic, but this is the employer's accrual, not a salary deduction.
Employers must pay within 30 days of the last working day where eligibility is met. Delays attract simple interest at the government-notified rate. Unreasonable denial attracts further penalties under the Code.
Gratuity is payable irrespective of service duration if the employee dies or becomes permanently disabled while in service. The amount is paid to the nominee or legal heirs.
For private sector employees, up to ₹20 lakh is fully exempt from income tax under Section 10(10). This is a lifetime ceiling across all employers combined, not per-employer. Amounts above ₹20 lakh are taxable as salary income.
Fixed-term employees receive gratuity on a pro-rata basis on completion or termination of the contract, once the one-year threshold with 240 working days is met under the Social Security Code 2020.
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